Question 1

Which of the following is a source of profit for a swap dealer?

Accepted Answer

A) Commission charged on the sale of bonds. 
B) Bid-ask spread. 
C) Margin account. 
D) Option premium. 
A) Commission charged on the sale of bonds. 
B) Bid-ask spread. 
C) Margin account. 
D) Option premium.

Question 2

Producers who hedge through the purchase of put options must remember that they may be:

Accepted Answer

A) reducing their profits compared to not hedging. 
B) obligated to sell their product at a lower than market price. 
C) increasing their overall risk. 
D) facing unlimited price risk. 
A) reducing their profits compared to not hedging. 
B) obligated to sell their product at a lower than market price. 
C) increasing their overall risk. 
D) facing unlimited price risk.

Question 3

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Accepted Answer

A) The buyer of a call with $5 strike price. 
B) The seller of a call with $5 strike price. 
C) The buyer of a put with $5 strike price. 
D) None of the choices. 
A) The buyer of a call with $5 strike price. 
B) The seller of a call with $5 strike price. 
C) The buyer of a put with $5 strike price. 
D) None of the choices.

Question 4

Most actively traded forward contracts are written on:

Accepted Answer

A) Canadian Treasury bills. 
B) Standard & Poor's index. 
C) Wheat contracts. 
D) Foreign currencies. 
A) Canadian Treasury bills. 
B) Standard & Poor's index. 
C) Wheat contracts. 
D) Foreign currencies.

Question 5

The derivatives market is characterized by:

Accepted Answer

A) stability. 
B) innovation. 
C) riskiness. 
D) private deals. 
A) stability. 
B) innovation. 
C) riskiness. 
D) private deals.

Question 6

PAWS Inc.has structured a currency swap through its bank.PAWS intend to use the funds to finance an expansion in its Irish operations.The terms are that PAWS will borrow $2 million at a 9 percent rate, with interest-only paid in the first two years and all principal repaid after three years.The bank will provide punts (Irish currency) at an exchange rate of Ir£.65/$and an interest rate of 12 percent.Illustrate the flows between PAWS and the bank during the three-year loan.

Accepted Answer

@#IMG-DLM& (flows in

Question 7

Which of the following statements is correct for an interest rate swap?

Accepted Answer

A) There is an exchange on principal between counterparties. 
B) There is no exchange of principal between counterparties. 
C) There is an exchange of currencies between counterparties. 
D) There is no exchange of cash between counterparties. 
A) There is an exchange on principal between counterparties. 
B) There is no exchange of principal between counterparties. 
C) There is an exchange of currencies between counterparties. 
D) There is no exchange of cash between counterparties.

Question 8

Why do corporations spend billions on insurance worldwide? Should corporations insure against all risk or does insurance make sense for some risks than others?

Accepted Answer

Insurance is a part of risk management t

Question 9

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales.Analysts project that price per ton could vary from $1,250 to $1,500.A September call option can be purchased with a $1,300 strike price for a premium of $145.What is Hershey's worst-case scenario if it purchases these options?

Accepted Answer

A) Cocoa prices will rise to $1,500 and Hershey is only protected to a price of $1,300. 
B) Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton. 
C) Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium. 
D) Cocoa Prices will remain below $1,300 and Hershey will lose $145 per option contract. 
A) Cocoa prices will rise to $1,500 and Hershey is only protected to a price of $1,300. 
B) Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton. 
C) Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium. 
D) Cocoa Prices will remain below $1,300 and Hershey will lose $145 per option contract.

Question 10

Both the seller and the buyer in a futures contract are required to put up margins.

Accepted Answer

A) True 
 B)False

Question 11

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

Accepted Answer

A) Buy a call option on the asset. 
B) Sell a call option on the asset. 
C) Buy a put option on the asset. 
D) Sell a put option on the asset. 
A) Buy a call option on the asset. 
B) Sell a call option on the asset. 
C) Buy a put option on the asset. 
D) Sell a put option on the asset.

Question 12

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

Accepted Answer

A) saved 50¢ per bushel through hedging. 
B) gained peace of mind at a price of 50¢ per bushel. 
C) the opportunity to avoid taking delivery, since price declined. 
D) locked in an effective price of $3.05 per bushel. 
A) saved 50¢ per bushel through hedging. 
B) gained peace of mind at a price of 50¢ per bushel. 
C) the opportunity to avoid taking delivery, since price declined. 
D) locked in an effective price of $3.05 per bushel.

Question 13

ABC Corp.entered into a currency swap with its bank, providing that ABC borrows $5 million at 10 percent and swaps for a 12 percent yen loan.The spot exchange rate is ¥105/$.If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank? (answer in millions)

Accepted Answer

A) ¥1.26 million 
B) ¥5.71 million 
C) ¥52.50 million 
D) ¥63.00 million 
A) ¥1.26 million 
B) ¥5.71 million 
C) ¥52.50 million 
D) ¥63.00 million

Question 14

Suppose that three days after taking out the futures contracts the price of September canola increases from $610 to $640 a tonne.What additional payments will be made by or to the farmer and the oil processor? What will be their remaining obligations at the end of this third day?

Accepted Answer

The farmer has a further loss of $30 a t

Question 15

A speculator takes a position in the futures market without holding an offsetting position in the commodity market.

Accepted Answer

A) True 
 B)False

Question 16

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 18 cents per pound?

Accepted Answer

A) The contract is marked to market with a $1,200 loss. 
B) The contract is marked to market with a $1,200 gain. 
C) Futures contracts are voided if price increases before expiration. 
D) Nothing happens until the expiration of the contract. 
A) The contract is marked to market with a $1,200 loss. 
B) The contract is marked to market with a $1,200 gain. 
C) Futures contracts are voided if price increases before expiration. 
D) Nothing happens until the expiration of the contract.

Question 17

Which of the following is not correct concerning forward contracts? Forward contracts:

Accepted Answer

A) are not standardized. 
B) do not set the price until the end of the contract. 
C) are not traded on organized exchanges. 
D) are not marked to market daily. 
A) are not standardized. 
B) do not set the price until the end of the contract. 
C) are not traded on organized exchanges. 
D) are not marked to market daily.

Question 18

Your firm has just tendered for a contract in Japan.You won't know for 3 months whether you get the contract but if you do, you will receive a payment of 10 million yen a year from now on.You are worried that if the yen declines in value, the dollar value of this payment will be less than you expect and the project could even show a loss.Discuss the possible ways that you could protect the firm against a decline in the value of the yen.Illustrate the possible outcomes if you do get the contract and if you don't.

Accepted Answer

One way to protect the position is to se

Question 19

As time draws closer to contract expiration, futures contract prices can be expected to:

Accepted Answer

A) increase as the demand for delivery intensifies. 
B) decrease as speculators resolve the uncertainty of prices. 
C) move similarly to broad-based market indices, such as the TSX 300 
D) converge upon the spot price. 
A) increase as the demand for delivery intensifies. 
B) decrease as speculators resolve the uncertainty of prices. 
C) move similarly to broad-based market indices, such as the TSX 300 
D) converge upon the spot price.

Question 20

Why are most futures contracts not settled through delivery of the product?

Accepted Answer

A) Most contracts are settled through the margin account. 
B) Most contracts expire with neither party having an obligation to the other party. 
C) Most participants cancel their futures contracts through purchase of an option contract. 
D) It is easier and cheaper to settle in cash or by offset. 
A) Most contracts are settled through the margin account. 
B) Most contracts expire with neither party having an obligation to the other party. 
C) Most participants cancel their futures contracts through purchase of an option contract. 
D) It is easier and cheaper to settle in cash or by offset.

Exam 26: Risk Management

Which of the following is a source of profit for a swap dealer?

Producers who hedge through the purchase of put options must remember that they may be:

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Most actively traded forward contracts are written on:

The derivatives market is characterized by:

Which of the following statements is correct for an interest rate swap?

Why do corporations spend billions on insurance worldwide? Should corporations insure against all risk or does insurance make sense for some risks than others?

Both the seller and the buyer in a futures contract are required to put up margins.

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

ABC Corp.entered into a currency swap with its bank, providing that ABC borrows $5 million at 10 percent and swaps for a 12 percent yen loan.The spot exchange rate is ¥105/$.If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank? (answer in millions)

Suppose that three days after taking out the futures contracts the price of September canola increases from $610 to $640 a tonne.What additional payments will be made by or to the farmer and the oil processor? What will be their remaining obligations at the end of this third day?

A speculator takes a position in the futures market without holding an offsetting position in the commodity market.

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 18 cents per pound?

Which of the following is not correct concerning forward contracts? Forward contracts:

As time draws closer to contract expiration, futures contract prices can be expected to:

Why are most futures contracts not settled through delivery of the product?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

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International Financial Management

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